Germany is heavily reliant on Russian natural gas for its energy needs, with over half of its supplies coming from Russia, making the country particularly vulnerable to the economic impact coming out of Russia’s invasion of Ukraine. As a first step, Germany suspended the operating license for the Nord Stream 2 pipeline, which would have delivered Russian natural gas under the Baltic Sea to Germany. More recently, Germany has accelerated plans to reduce its dependence on Russian energy and diversify its supplies, striking deals with UAE and Qatar for LNG. A German official estimates that the country could be independent from Russian natural gas by mid-2024. In the meantime, if the situation escalates and Germany is forced to implement its highest warning level, the government is likely to take over distributing natural gas to ensure adequate natural gas supplies for “protected customers”—households and hospitals, and other essential services.
Germany’s Natural Gas Rationing Plan
Germany triggered an emergency plan to manage natural gas supplies due to a standoff over a Russian demand to pay for fuel with rubles, which could disrupt or halt supplies. Russia is insisting on ruble payments for the Russian gas that meets a third of Europe’s annual energy needs. In 2021, Russia accounted for 55 percent of Germany’s natural gas imports and 40 percent in the first quarter of 2022. Most payments are currently in euros or dollars and Germany and other G7 countries said it will continue to honor contracts under the current payment terms. Euros account for 58 percent of Gazprom exports, U.S. dollars 39 percent and sterling around 3 percent. A group of economists estimated that EU countries transferred more than €13.3 billion ($14.7 billion) to Russia for oil, natural gas and coal since the war began.
Germany’s “Emergency Plan Gas” has three levels. The three-stage emergency plan details ways to conserve gas, secure supplies and make sure households have adequate amounts of fuel. The first level, which the government has already triggered, is the early warning level, when there are signs a supply emergency could develop. Germany’s gas storage is currently filled to about 25 percent capacity. The second is alarm, when a disruption to supply or extraordinarily high demand upsets the usual balance but can still be corrected without intervention. The third level is emergency, when market-based measures have failed to remedy shortages. At the third stage, Germany’s network regulator, the Bundesnetzagentur, decides how to distribute any remaining natural gas supplies across the country.
Industry, which accounts for a quarter of German natural gas demand, will be affected first under stage 3 and, in many cases, cutting back on natural gas would mean companies’ stopping production, causing industrial production to shrink by as much as 9 percent. Apart from energy providers, the industries most worried about losing gas include chemicals, where natural gas is used to make plastics, fertilizer, fibers and solvents. Carmakers also depend on chemical products for batteries and lacquer. Refineries need natural gas to run crackers to make naphtha, gasoline, jet fuel, diesel and heating oil. Electric utilities that accounted for 13 percent of natural gas consumption last year could switch to coal burning plants. However, an ongoing coal program to retire units would need to be changed under the emergency laws to ensure enough coal capacity is available.
Private households have priority over industry, while hospitals, care facilities and other public sector institutions with special needs would be last to be affected by a disruption. Half of Germany’s 41.5 million households heat with natural gas, while industry accounted for a third of the 100 billion cubic meters of national demand in 2021.
Germany Makes Deals with Qatar and UAE
Qatar is one of the largest exporters of liquefied natural gas (LNG), having built the infrastructure to liquefy it for transport. In 2019, the emirate exported nearly 107 billion cubic meters of LNG, which would be enough to completely cover Germany’s needs. Qatar currently supplies about 30 percent of its liquefied gas to the European Union, but almost none of it to Germany, which lacks LNG terminals, relying mainly on cheap natural gas piped from Russia. Germany would have to import LNG via terminals in neighboring countries, until two terminals are built, probably in Wilhelmshaven and Brunsbüttel on the north coast. The terminals could be ready for operation in five years despite such projects taking three times as long to be completed normally.
In the Emirates, Germany plans to purchase green hydrogen, which is produced by electricity from renewable energy sources. Germany intends to replace coal with green hydrogen as an energy source in German industry in the future. UAE has been investing billions—$163 billion—in a “green” economy with two of the world’s largest solar power plants located in the UAE. Germany signed five agreements for better cooperation in this field in the coming years. But there are many technical solutions that need to be solved before hydrogen, in liquid form and huge quantities, can be brought from the UAE to Germany. UAE is under fire for its human rights policy and poor working conditions. Similar to U.S. President Joe Biden’s attempt to get oil from Venezuela, Germany is looking to replace natural gas from Russia with energy from an autocratic Emirate.
The Russian invasion of Ukraine has changed many perceptions and certainties in Europe with Germany at the forefront since it is most dependent on Russia for energy supplies, particularly natural gas. Germany wants to be independent from Russian energy by mid-2024. In the meantime, because Russia wants European countries to buy its energy in rubles, which G7 countries will not honor, Germany has put together a rationing plan for natural gas, hitting industry first with disruptions and households and hospitals last. Germany is also striking deals with Qatar for LNG and green hydrogen with UAE to get alternate supplies. It intends to receive its LNG from neighboring countries until its two LNG receiving terminals are built over the next 5 years. More actions may be needed as Russia just widened the list of export products priced in rubles to include: fertilizer, grain, food, oil, coal, metals, timber etc. Because Russia is a major producer of all these commodities, disruptions and price volatility should be expected.